Mixed economic data

Arrow graph pointing upwards
Some good news, but clouds on the horizon

News that the UK economy grew by half a percent during the third quarter is something that can be celebrated, especially after the recently-reduced assessment of 0.2% second quarter growth and 0.1% for the first quarter. Of course, this 0.5% growth – while ahead of expectations and still liable to adjustment (upwards or downwards) in future months – is still far less that we have previously been accustomed to.

Unfortunately, the manufacturing sector remains in decline, with the overall growth stemming from services. While the service sector is important to us, many economists feel that so much emphasis on one part of the economy is not good for jobs, especially manual-based ones, and that we really need to see more growth in manufacturing – particularly for export.

Will this affect investors?
Investors always like to see economic growth, because it suggests that the businesses in which they invest are moving forwards; generating greater profits that can be used to sustain dividend growth and thus support increasing share values.

But if too much of our growth comes from services – particularly banking and insurance – this can leave investors disproportionately reliant on an area of business that is highly susceptible to external factors.

Of course, all forms of business today are dependent to some extent on what is going on in the wider world; businesses cannot easily export to countries that are in economic decline; which is why it is so important to focus our attention on the developing economies such as China and India for our own growth. Manufacturing exports are clearly difficult to countries where labour is so cheap; conversely, there appear to be indications that consumers’ expectations in these territories are increasing, which may expand demand for some of the goods and services we can offer.

Over-reliance on services
Unfortunately, the very area in which we excel – services – is highly susceptible to the ongoing problems in banking driven largely by the debt crisis in Greece (and the potential for similar developments in Italy, Spain and Portugal).

News that the Greek Prime Minister, George Papandreou, has called a referendum on the austerity measures necessary to facilitate the bailout has therefore cause concern not just in Germany and France – the euro countries most involved in the rescue – but also in world stockmarkets, particularly in banking sectors.

No time to panic
While there is probably no need for investors to start ‘bailing out’ of banks as an emergency measure, they may wish to consider the implications of a potential extension of the credit crisis on the sector. Anyone who is currently overweight in banking and financial services may should seek professional advice regarding whether they should alter their asset allocation strategy.

Should economic uncertainty continue, however, many more sectors than just the banks and insurance companies (who are massive investors) are likely to be adversely affected.

Regular reviews to ensure that investments are balanced – and thus best able to weather any storms – is a good idea for everyone; those investing for retirement, as well as those with a slightly shorter timeframe in mind.

Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.


Quantitative easing and you

Tudor housing
Nothing is new

Back in the mid 1540, Henry VIII debased the coinage in order to help pay for his disastrous wars with France and Scotland. The result was a high level of inflation.

This month, the Bank of England has decided that it needs to print more money through quantitative easing – arguably the modern day equivalent of adding copper to silver coins, since it puts more money into circulation without taking anything out of the economy to compensate.

With low interest rates already, the Bank clearly feels it has no alternative way of helping to inject a much needed stimulus into the economy; it may be right.

Why the need to ‘print money’?
According to the Bank’s calculations, the first £200 billion of quantitative easing contributed up to 1.5% towards inflation, but also prevented the economy from going into a double dip recession (source: Telegraph – 19/09/11). Now it is to create a further £75 billion, not to help us fight the French but partly to help us fend off the financial implications of a banking crisis created by the inability of Greece to reduce its borrowing.

Actually, this is only part of the picture. Poor data from the US and rising unemployment in the UK are probably symptomatic of a wider malaise in the economy that shows the developed world failing to generate significant (if any) domestic growth or to build on the growth within emerging economies such as India and China. Even without the impending banking crisis, something needs to be done to help boost the economy. Many outside bodies – that have no interest in our domestic politicking – appear to agree that the aim of slashing the UK’s borrowing is essential as a precursor to recovery. Conversely, many are pressing for some form of growth strategy that appears still to be sadly lacking. QE2, as this second tranche of quantitative easing is becoming known, could be at least part of the solution.

What might happen this time?
It is essential, however that this round of injecting money into the banking system does not, as previously, simply serve to strengthen bank balance sheets (important as this is to us all). It must reach the real economy in such a way that it stimulates growth in manufacturing and exporting, if we are to benefit. Otherwise we will simply see inflation and an even longer period of low interest rates.

Pensioners will pay the price
And here, of course, comes the crunch. The immediate impact of QE2 will be to further to depress annuity rates, becasue gilt prices will fall as a result of the cash injection. From a wider perspective for savers, particularly those in retirement, interest rates are unlikely recover for some time which will mean that bank and building society deposits will continue to offer poor returns.

The longer term implication is that inflation is likely to stay at relatively high levels, rather than falling back as the Bank of England has been predicting. This compounds the impact on those with fixed incomes, or where increases fail to keep pace with real inflation.

Those planning for retirement should be aware that reverses of this nature are by no means isolated and that boosting retirement funds as quickly as possible is the only way of countering the adverse effect that QE2 – and further such actions – could have.

Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.


Virgin Banking

According to a recent report in the Sunday Times, Richard Branson hopes to enter the banking sector by buying up some of the RBS branches that the European Commissions is making it sell off, because of the government subsidy it has received.

Actually, it looks as if the sale of some 320 former Williams & Glyn’s branches may be grinding to a halt, because the purchaser is going to have to stump up money to cover a £3billion funding gap. Apparently the branches involved are dependent on emergency funding from the Bank of England. The loans, part of the package of aid extended to RBS under the Special Liquidity Scheme, will quickly have to be replaced by the new buyer. In addition at least £2 billion of capital will also be required to support current lending.

The “end of free banking”
What really grabbed my attention, however, was that the new Virgin Bank says it will be charging for all accounts, irrespective of the level of monthly deposits and without offering any special benefits, in return. According to Virgin, everyone knows that there is ‘no such thing as free banking’ and that banks make their money by hidden charges on overdrafts and so on.

Virgin says it is being transparent about its charges; what it is really doing in making a virtue of necessity. It cannot make money without levying charges, so it says they are a good thing for everyone. But in fact the vast majority of bank customers probably never pay these charges, anyway.

One could argue that if we simply avoid Virgin, we will not have to pay the charges; but it is not operating in a vacuum. Three years ago, First Direct introduced a £10 monthly charge for current accounts and other banks have been quietly introducing so-called ‘premium’ accounts that carry charges in return for add-ons, most of which many customers may never use. According to one source, these accounts now represent about half the number of current accounts; a tribute to aggressive marketing rather than any inherent value in them.

Is Virgin good for businesses?
Over the years, Virgin has entered a number of business sectors including insurance and music. In each case it has promised something new but, in general, it has simply caused problems for the existing participants. Of course, competition is often healthy; insurance companies in particular had become complacent and a bit of a shake-up can be helpful. But whether consumers benefit in the longer term is open to question.

What of the future?
If Virgin succeeds in getting off the ground only offering accounts that charge you to keep your money, it is only a matter of time before greedy bank bosses realise that they can do it too and free banking really will disappear.

It would be a sad day for the vast majority of consumers and a great one for the bonuses of Sir Fred Goodwin’s successors.

Getting advice
As ever, when it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do contact Robert Bruce Associates for individual assistance.


Out of recession?

UK has raced out of recession at 0.1 mph (sorry 0.1% growth in Gross Domestic Product) according to the Office for National Statistics. The problem is that: (a) we all know that these figures are likely to be revised upwards or downwards over the next few months; and (b) this is only a quarter of the growth many had expected and could well be a precursor to the second half of a double-dip or “W” shaped recession.

Surely any growth is good news?
Actually this is not necessarily, true. In the first place, we are well behind most of our competitors in recovering from recession. Arguably, things could be much worse had the government not decided to try and spend its way out of recession in a Keynesian way. On the other hand, had we not been so much in debt at the start of the banking crisis, we might have been better able to weather the storm in the fist place.

We need growth in consumer spending, if the economy is to recover; what we largely got is growth in the hotels and catering sectors plus, of course, motor trade. The latter was helped largely by the government’s scrappage scheme – which has been far more successful than we had initially feared. However one bright spark on the horizon (real recovery is clearly still ahead of us) was that manufacturing grew by 0.4%, the best performing sector.

The real fear is that much of the growth was driven by government support, including quantitative easing, which is finite and will have to be withdrawn – probably sooner, rather than later – as it becomes increasingly unaffordable.

So where does this leave us?
Firstly, the government’s plans are based on what we can now see are overly optimistic projections of tax revenue, as GDP was expected to grow faster. This throws all its spending plans – and any hope of repaying its massive borrowing – into jeopardy. But is also has wider implications. Sterling fell on the news, making it theoretically possible that interest rates would have to rise here in order to attract money back to a weakened economy.

Actually this is unlikely (a pity for savers) because the money pumped into the economy over the past year or so via the Bank of England’s quantitative easing programme is potentially inflationary and increasing interest rates could exacerbate the position.

What can we do?
A weak pound is usually good for exporters and we have long held that the economy needs to be re-balanced towards industry. Finance certainly attracts invisible exports, and we have benefited from this for a long time. But a diverse economy could be better for us in the longer term because it would reduce our reliance on a sector that is more globalised than any other – and therefore susceptible to large organisation threatening to take their HQs overseas, thus reducing the power and importance of London.

Perhaps we need to ask ourselves some fundamental questions: are we still a world-class power; should we strive to be; would it matter if we were not? If the answer to all three were to be a resounding “no” then we could review our spending on overseas issues and consider cutting some unnecessary budgets.

Getting advice
As ever, when it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do contact Robert Bruce Associates for individual assistance.


Is the tail wagging the dog?

Lloyds and RBS are about to receive up to an additional £40 billion or so of our money in the form of additional capital. Strangely, the RBS deal has been structured so that, while our share of the business increases to 84%, we are only entitled 70% of the voting rights. In the case of Lloyds, putting in some £5.7 billion will not give us an increased proporiton of the business, because other investors are also putting in money, through a rights issue.

I will not go into the details of the deals, because this has already admirably been done by Tony Bonsignore on the Citywire website. What I would like to look at is the underlying philosophy of taxpayer support for the banks.

Why are we supporting them?
We are told that we rescued the banks because they are vital to our economic survival. I suspect that this is true, but only because they have been allowed to become so large that there are insufficient competitors who could take up the slack, should one crash.

The fact is that the entire credit crunch was down to a combination of influences, including irrational and excessive lending and logic-defying investment programmes that were beyond the capacity of regulators to understand or monitor. In other words, the banks were the cause of their own downfall.

Who benefits?
Yet it seems to me that the ‘solutions’ currently on offer – effectively pumping even more money into the system – are there for the benefit of the banks (well actually, the management of the banks), not the economy as a whole.

After all, nothing in the new set-up appears to prevent the payment of massive bonuses (although some will be deferred for a couple of years), there appears to be nothing that forces the banks to increase lending to businesses and individuals (despite what politicians claim) and they will be selling off some of their branches (and in the case of RBS, several insurance companies) without any of the money going to the taxpayer.

When you really get down to it, we are being asked – well actually given no choice – to pour more money into the banks for no return; at least not for many years in all likelihood. Yet at the same time, taxpayers will be facing fiscal tightening in the form of higher VAT, increased National Insurance contributions and (as yet unknown) other tax increases.

Is this fair?
It is all too easy to blame the bankers; in fact there are other guilty parties including governments for favouring the city over manufacturing industry, regulators for failing to understand what the investment whiz kids and the lending managers were up to and, let it be said, ourselves for borrowing more than we could reasonably expect to repay other than with benefit of inflation to reduce the value of our debts. The government is the worst offender in this context, but according to Credit Action, as individuals we still owed some £1,459 billion in September, which is slightly up on a year ago and more than twice as much as at the start of the decade. In fact the only good news is that the rate of increase has slowed dramatically over the past two years.

But on balance it seems to me that the bank rescue and its aftermath has been structured to help bankers, rather than consumers, businesses and taxpayers. A case of the tail wagging the dog – at least it would be were the tail not so massive that the comparison is inadequate.

As ever, when it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do contact Robert Bruce Associates for individual assistance.


The conference season is here again

Oh good; the political party conference season is here again! I am not sure that I would not rather watch paint dry, but at least the goings on at Bournemouth and elsewhere do produce the odd point of interest.

In this case, I was particularly interested in comments made by Vince Cable about taxation. I will not go into the details, but his proposals that homes valued at more than £1 million be taxed each year and that the personal allowance should be raised to £10,000 in order to take many low earners out of tax altogether (not a new proposal), do have a degree of elegance, whatever we may think about them personally.
What does Vince Cable know?
Actually, Dr Cable is probably one of the best qualified people in the Commons to comment on economic issues as he has a PhD in economics (from the Glasgow University) before becoming a lecturer at the LSE and was Chief Economist for Shell in the mid 1990s.

There are good reasons for listening to him, because he has a track record of making considerable sense (whatever your political leanings); he was one of those giving early warnings about the Credit Crunch.

In the case of taxing high value homes, what is proposed could make sense in a number of ways. Most of us feel that stamp duty is a pain; it should work on a ‘top slicing’ basis, not one that applies a higher rate to the entire purchase price, once a certain threshold is exceeded. The problem is that changing it could cause house price inflation and, however much we may want to see the value of our own homes rise, this would hurt first time buyers. Actually, it would be bad for the economy as a whole; it was rapidly rising home prices that made a major contribution to the recent economic crisis, by making consumers borrow too much – and not notice that the government was doing the same too. Now the country is sinking deeper into debt and repayment costs are escalating.

You have to ask yourself if this proposal, however painful for many, might not serve the purpose of easing the risk of recovery in the housing market, by reducing pressure at the top?

But is this the real world?
Unfortunately, we live in the real world; one in which worthy (and, perhaps not so worthy, looking at the CBI’s ideas on student loans) suggestions appear to become increasingly incapable of implementation the more remote from high office – and being able to apply the ideas – the proponent.

There is considerable value in ‘green field’ thinking; it may never reach the statute book, but it could spark debate that leads to less ‘extreme’ and more practical ideas. It is all down to consensus. As the Times said on Tuesday, if you want green, you may have to add a little bit or yellow to the blue.

And while we are about it …
I notice that Treasury mandarins say that George Osborne is saying that his claim that Labour is planning a 3p tax rise is totally unfounded. They may be right, but if they are subsequently proved to be lying they are acting politically, not independently, and must be sacked at once. There is no room for civil servants to lie to protect ministers.

As ever, when it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do contact Robert Bruce Associates for individual assistance.